CNAS Insights | The Export Control Loophole Fueling China's Chip Production

This week, Reuters reported that China has apparently built a prototype of an extreme ultraviolet lithography (EUV) system, a highly intricate machine used to produce cutting-edge AI chips that the United States and its allies had successfully kept out of Chinese hands for years. While the news may suggest China is closing the gap, Beijing has a track record of overstating semiconductor equipment breakthroughs. Even taking this claim at face value, the prototype reportedly won’t reach commercial viability until 2030 at the earliest. While policymakers should take China’s ambitions seriously, the real threat is its easy access to older lithography equipment that can still produce advanced AI chips at scale. The Trump administration must close this loophole to deny China’s ability to scale chip production and protect U.S. chipmakers’ global edge.

Until recently, only one company in the world was thought capable of manufacturing an EUV system: the Dutch semiconductor manufacturing giant ASML. In 2019, the first Trump administration presciently worked with the Dutch government to deny China access to ASML’s EUV tools. This strategy has been remarkably successful, forcing China into years of expensive attempts at reverse-engineering and domestic development. But while China struggles to develop and scale EUV, it’s quietly exploiting a loophole in export controls that allows unchecked access to previous-generation equipment.

Chinese chipmakers have discovered how to enhance older equipment—deep ultraviolet immersion lithography (DUVi) tools that aren’t subject to such restrictions—to make chips that come uncomfortably close to the cutting edge. In recent years, Chinese chipmakers have learned to apply a process called multipatterning to DUVi equipment to produce smaller and more powerful chips. This process dramatically reduces yields, makes chip production slower and more costly, and still can't match the cutting-edge chips from U.S. and allied chipmakers. Yet deploying these techniques at scale could allow China to fabricate enough chips to accelerate its AI progress.

China has moved to seize the opportunity. Its chipmakers are now actively applying multipatterning to exploit this export control loophole and produce restricted semiconductors. Existing export controls ban only the most advanced DUVi tools to all of China. Less advanced DUVi tools are banned only for specific entities, leaving most Chinese entities free to purchase them. Even banned entities can access equipment purchased before the export controls or illegally obtained from entities not subject to the controls. The truth is in the numbers: ASML, the leading maker of DUVi systems, sold 70 percent of its DUVi lithography systems to Chinese entities in 2024.

This equipment flow threatens U.S. interests in three critical ways. First, it significantly weakens the impact of existing export controls: If Beijing can produce its own advanced chips, Washington loses its most powerful lever in ensuring the United States maintains its AI edge over China. Second, it enables China to close the compute gap that remains its primary bottleneck to large-scale advanced AI training and deployment. Third, if China can scale production of advanced AI chips and offer the world cheaper alternatives, it would erode U.S. chipmakers’ and AI companies’ positions in global markets.

It is fair to ask why the United States should restrict China’s ability to produce less capable AI chips if the United States still has access to those at the bleeding edge. Computing power isn’t just about chip quality; it’s also about quantity. China can shrink its compute gap with the United States by deploying less advanced chips at scale. This approach is more energy-intensive, but this is less of a concern for a country building new energy sources ten times faster than the United States.

Beijing understands this dynamic and is racing to reduce its dependence on foreign semiconductors. Beyond the headline-grabbing EUV prototype, China has also attempted DUVi indigenization. Recently, Chinese startup Yuliangsheng reportedly made a DUVi tool for AI-capable chips that is being tested by the Semiconductor Manufacturing International Corporation (SMIC), China’s leading chip manufacturer. China has touted this development as evidence that it’s closing the compute gap with the United States, but substantial challenges remain. Lithography tools take years to become commercially viable, and chipmakers face difficulties introducing new tools into their production processes. In the meantime, China remains heavily reliant on the U.S. and allied semiconductor ecosystem. Last year, SMIC and other Chinese firms bought $38 billion in equipment from the five top allied semiconductor manufacturing equipment suppliers—an increase of 66 percent from 2022, when the United States introduced country-wide export controls on advanced chipmaking tools.

Current policy is not only allowing China access to chipmaking equipment; it’s also extending the equipment’s lifespan. ASML’s DUVi lithography machines require specialized maintenance that only the company can provide. ASML actively services machines in China, despite U.S. pressure on the Dutch government to prevent this, potentially extending machine lifespans to 30 years. According to one semiconductor manufacturing expert, ASML tools require maintenance by the company about every six months. Cutting China off from this regular maintenance would significantly degrade its DUVi fleet in just a year, helping to maintain the compute gap for democratic countries.

Some critics argue that tighter restrictions will merely accelerate China’s push to produce advanced lithography machines of its own. China’s reported EUV prototype seems to validate this concern. But that ship has sailed. China identifies semiconductor sovereignty as a strategic imperative and has pushed to indigenize its AI ecosystem for over a decade. New restrictions won’t change that objective.

Restricting access to foreign tools, however, would slow China’s timeline for indigenization. And denying maintenance of its existing stock would force Beijing to make critical trade-offs between triaging old tools and advancing new ones, given its limited pool of high-end lithography engineers.

The U.S. Congress has started to recognize the urgency to act. The House Select Committee on the Chinese Communist Party (CCP) recently called on the Trump administration to implement a country-wide ban on DUVi tool sales to China and to increase coordination with allies to strengthen export controls. Representative Bill Huizenga (R-MI) recently underscored the stakes: “If the free world blocked China’s access to these machines, American allies would control the defining technology of our time.”

The path forward starts with diplomatic coordination with allies and partners to better align and enforce export controls. The United States should broaden its chip alliance with the Netherlands and Japan to include Germany and South Korea, which control the chokepoints of optical systems and high-bandwidth memory, respectively. U.S. export authorities should also leverage this alliance to prevent allied semiconductor manufacturing companies from providing maintenance on existing DUVi tools in China. The legal basis is clear: Advanced Chinese fabs have likely acquired semiconductor manufacturing equipment in violation of U.S. export controls and have produced chips for restricted entities like Huawei.

Although working with allies and partners is the best option, the United States can act unilaterally if necessary. The Bureau of Industry and Security, the lead agency for export controls, can expand its rules to cover all DUVi equipment made outside the United States by invoking the Foreign Direct Product Rule to block all sales to China. Deploying this rule extraterritorially against unwilling allies would be an extreme measure, but it remains an option that can help the United States strengthen its negotiating position.

A comprehensive DUVi restriction carries real costs. It would impose commercial losses on allied firms like ASML, Tokyo Electron, and Nikon. It would inevitably invite Chinese retaliation. It would also require sustained diplomatic engagement to maintain alignment with the Netherlands, Japan, and other allies and partners. The cost distribution is asymmetric: Allied chipmaking firms face commercial losses while U.S. chipmakers and AI companies benefit from restricted Chinese competition. But American leadership in AI serves the entire alliance's interests. Maintaining U.S. technological dominance over China is a strategic imperative that requires allied firms to accept near-term costs—costs that are modest compared to the significant consequences of Chinese AI superiority.

The Trump administration should push Japan and the Netherlands to establish a unified position. President Trump has successfully pressured allies in other matters of shared security—and he should do it again to ensure the world’s democracies retain their AI edge. In order to preserve industry and national security interests, the president must ensure that the United States doubles down, not backs down, on these controls.

Michelle Nie is a visiting fellow with the Technology and National Security Program at the Center for a New American Security.

Autumn Dorsey is a visiting research associate in the Center for Technology and the Human Person at The Heritage Foundation.

Janet Egan is a senior fellow and deputy director of the Technology and National Security Program at the Center for a New American Security.